The financial well-being of a company is typically the domain of the finance and accounting side of operations. However, there is a role that risk managers can play in helping to effectively use a company’s capital.
One way is to understand what a commercial surety bond can do for your organization and work with your finance teams to identify opportunities to replace traditional financial assurance instruments, such as letters of credit, with commercial surety bonds. This allows other credit facilities to be used more effectively.
What is a commercial surety bond?
According to the Surety Association of Canada, commercial surety bonds satisfy the security requirements of federal and/or provincial courts, government bodies, financial institutions and private corporations and protect against financial risk.
A bond serves as a guarantee that a business will comply with all obligations covered by the bond, failing which, the Insurer is responsible.
What are the advantages of a commercial surety bond?
- Surety bonds allow qualifying companies access to unsecured credit for things like licences, permits or other legal or regulatory obligations. They free up capital that can be invested into operations.
- Bonds also don’t have the same security requirements as traditional letters of credit and allow companies to diversify their providers of guarantee products.
- Finally, access to surety bonds, particularly those smaller in size, are typically faster and more efficient than securing credit from a financial institution and require less (or no) collateral or standby fees to access funds.
Two types of commercial surety bonds:
| Transactional surety bonds | Large commercial surety bonds |
Valued from $10,000 to $100,000 and used for specific, short-term needs. Examples of transactional surety bonds: Court bonds
Customs bonds
Licence and permits bonds
Lost document bonds
Credit criteria for transactional surety bonds:
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Valued at $1million or more and usually used to demonstrate that a company has the financial wherewithal to meet the regulatory requirements of higher value obligations. The complexity of these bonds varies and are often contingent on the obligations required. Examples of large commercial surety bonds:
Credit criteria for large commercial surety bonds: Positive financial outlook over the long term with a focus on:
The decision-making matrix for eligibility is complex and will vary by company and industry. Large commercial surety bonds are not available to every company. |
Could your organization use a commercial surety bond?
The first step in finding out is to have a conversation with your CFO about any letters of credit that could be replaced with bonds. Insurers like Aviva will review financial assurance requirements where a letter of credit is used and assess whether it’s possible to develop a surety bond product as an alternative.
Aviva has a number of existing commercial surety bond products and can create custom solutions for your business, if it meets our underwriting requirements.
Global Corporate & Specialty team is here to answer questions and offer advice. Reach out to us at gcs.ca@aviva.com
